Journal of International Development

J. Int. Dev. 21, 971–984 (2009)

Published online 6 October 2008 in Wiley InterScience
(www.interscience.wiley.com) DOI: 10.1002/jid.1490

SMALL-SCALE FARMER PARTICIPATION IN

NEW AGRI-FOOD SUPPLY CHAINS: CASE
OF THE SUPERMARKET SUPPLY CHAIN
FOR FRUIT AND VEGETABLES IN
HONDURAS
JOSE BLANDON*,y, SPENCER HENSONz and JOHN CRANFIELDx
University of Guelph, Ontario, Canada

Abstract: This paper explores the role of transaction costs and collective action in shaping
small-scale farmer participation in the fresh fruit and vegetable (FFV) supply chain
to supermarkets (SSC) in Honduras. Transaction costs and collective action are found to
be significant in determining farmer participation in the SSC. Contrary to the findings of other
studies, human capital and farm characteristic variables are not significant, suggesting that
small-scale farmers can be included in new supply chains under certain conditions, especially
if incentives to farmers, trust-based relationships between buyers and sellers, risk reduction
practices and new forms of collective action are put in place. Copyright # 2008 John Wiley &
Sons, Ltd.

Keywords: transaction costs; collective action; agri-food system; small-scale farmers

1 INTRODUCTION

In developing countries, processes of transformation of agri-food systems, and in particular

the predominant drive towards agro-industrialisation, are well established (Reardon and
Barrett, 2000; Pinstrup-Andersen, 2002; Swinnen, 2007). Many factors underlie these
processes, including advances in production, process, logistical and communication
technologies, liberalisation of domestic and international markets, shifts in consumer

*Correspondence to: Jose Blandon, Department of Food, Agricultural and Resource Economics, University of
Guelph, Guelph, Ontario N1G 2W1, Canada. E-mail: jblandon@uoguelph.ca
y
Post-Doctoral Fellow, Department of Food, Agricultural and Resource Economics, University of Guelph, Guelph,
Ontario N1G 2W1, Canada.
z
Professor.
x
Associate Professor.

Copyright # 2008 John Wiley & Sons, Ltd.

972 J. Blandon et al.

demand, among others (Reardon and Timmer, 2005). The implications for small-scale
producers in developing countries are ‘hotly’ contested across various literatures; from the
spectre of small-holder exclusion from higher-value markets (see for example Dolan and
Humphrey, 2000) at one extreme to the scope for processes of upgrading and livelihood
enhancement at the other (see for example Stanton, 2000). Until recently, the main focus
of this debate was on the integration of small-scale producers into global supply chains
(see for example Jaffee and Bintein, 1996; Dolan and Humphrey, 2000), although more
attention is now being given to the transformation of domestic agri-food markets and
the rise of higher-value segments in developing countries as incomes increase alongside
other socio-demographic changes (Reardon and Berdegué, 2002; Berdegué et al., 2005;
Henson and Reardon, 2005).
Various authors have investigated the ways in which the relationship between small-
scale farmers in developing countries and agribusiness firms can act to enhance rural
livelihoods. It is contended that such markets can offer small-scale farmers the opportunity
to produce and sell differentiated and value-added products (Key and Runsten, 1999;
Reardon and Barrett, 2000; Reardon and Berdegué, 2002), translating vertically-
coordinated relationships into premium prices and allowing producers to capture a greater
share of the price paid by final consumers (Hobbs et al., 2000; Levins, 2002; Fairbairn,
2003). The contract farming literature, likewise, reports that small-scale producers may
benefit from enhanced access to credit, technology, management skills, market information
and/or inputs under the commitment of delivering produce of specific characteristics to the
contractor (Glover and Kusterer, 1990; Key and Runsten, 1999; Singh, 2002; Masakure and
Henson, 2005). There is also evidence that contractual relationship between buyers and
sellers can help reduce market imperfections and transaction costs (Key and Runsten,
1999; Hellin and Higman, 2003), acting as an effective mechanism to link small-scale
farmers to high-value markets (Glover and Kusterer, 1990). Further, an increasing body of
research suggests that participation in high-value markets can translate into reduced
poverty (see for example McCulloch and Ota, 2002; Minten et al., 2006; Maertens and
Swinnen, 2007). At the same time, however, a parallel literature raises concerns about
the scope for exploitation of small-scale producers by large agribusinesses (see for example
Little and Watts, 1994; Fold and Pritchard, 2005), related predominantly to how the nature
of contractual relationships changes over time and the scope for dependences to develop as
small-scale producers become ‘captured’ by large commercial interests.
In the development literature there is increasing recognition of the growth of
supermarkets in developing countries and the potential impact on marketing systems for
agri-food products (Reardon and Berdegué, 2002; Reardon et al., 2004). Comparable
changes are also taking place in the processing sector, such that the structural and
operational distinction between export and domestic supply chains is becoming
increasingly blurred. There is recognition of the market opportunities that new supply
chains can offer to small-scale producers, while there are concerns that the challenges
faced by small-holders in accessing the associated procurement systems can be prohibitive
(Henson and Reardon, 2005). In particular, these supply chains are increasingly carried out
through contractual arrangements in the context of exacting safety, quality and/or logistical
requirements that are increasingly being codified through private standards (Reardon et al.,
2004; Henson and Reardon, 2005). Indeed, the rise of contractual exchange, which is
progressively replacing spot market (SM) transactions, is considered one of the more
significant changes in the agri-food systems of developing countries (Reardon and Barrett,
2000). Although there is a lack of data on the proportion of transactions undertaken under

Copyright # 2008 John Wiley & Sons, Ltd. J. Int. Dev. 21, 971–984 (2009)
DOI: 10.1002/jid
 Small-Scale Farmer Participation in New Agri-Food Supply Chains 973

such arrangements, an appropriate indicator is the rise in the share of retail food sales
accounted for supermarkets, for example as documented by Reardon and Berdegué (2002)
and Berdegué et al. (2005) (see below).
Here we explore the scope for small-scale producers to engage in evolving supply chains
to supermarkets in the context of Latin America, and specifically Honduras. As will be seen
below, the rapid growth of the supermarket sector in this region provides a suitable context to
explore the processes of inclusion and exclusion of small-scale producers into contemporary
supply chains. While we do not focus specifically on the degree to which small-scale
producers benefit (or are captured) by the contractual relationships associated with these
supply chains, such considerations are implicit to the attributes that we contend govern
the propensity of small-holders to engage in supermarket supply chains rather than SM.
The transformation of the food retail sector in Latin America since the early 1990s is
characterised by processes of consolidation and multi-nationalisation of supermarket
chains (Reardon and Berdegué, 2002; Reardon et al., 2004), with Brazil, Argentina and
Mexico occupying the lead position in terms of supermarket sector growth and market
penetration. Supermarkets are also spreading to smaller and poorer countries in the region.
Thus, in Central America there were around 700 supermarket stores in 2000, with the
Central American Retail Holding Company (CARHCO) alone having 253 stores and sales
of US$1.3 billion (Reardon and Berdegué, 2002, p. 378). By 2005, the number of stores
operated by CARHCO had increased to 375, with sales of US$2.2 billion (Corporación de
Compañı́as Agroindustriales, CCA, 2006). Such growth has enabled CARHCO to capture
a 50 per cent share of retail food sales in Central America. In 2005, Wal-Mart acquired
a 33 per cent stake in CARHCO and increased its share further to 51 per cent in 2006
(CCA, 2006).
In Honduras, which is the specific case we explore below, there were 37 supermarket
stores in 2002, compared to 130 in El Salvador, 132 in Guatemala and 227 in Costa Rica
(Berdegué et al., 2005). Despite the relatively small number of stores in Honduras
compared to neighbouring countries, supermarkets are estimated to have accounted for
43 per cent of retail food sales in 2005, which is higher than neighbouring countries such as
El Salvador (Lundy et al., 2007). Further, there are two significant supermarket hubs based
in the major urban centres of Tegucigalpa and San Pedro Sula which are the predominant
markets for food products. Looking to the future, with the regionalisation of supermarket
chains in Central America, the penetration of supermarkets in retail food markets in
Honduras is increasing rapidly, while disparities across the region in the penetration of
supermarkets are fast disappearing.
It is argued that the rise and multi-nationalisation of the retail sector in Central America
is bringing forward opportunities for small-scale farmers in the region to break out of
traditional markets and enhance their income through production of higher-value products
(Reardon and Berdegué, 2002). At the same time, the contractual arrangements and
standards associated with supermarket supply chains tend to favour larger and more highly
capitalised producers (Hernández et al., 2007; Neven et al., 2007). This suggests that, many
small-scale producers who value, for example, the greater security and/or lower risk
potentially associated with supplying under contract, may be excluded from such supply
chains. Here we focus on the specific role of transaction costs, and the mitigating influence
of collective action in determining participation in the supermarket chain. We argue that
transaction costs play a key role in mitigating the participation of small-scale producers in
new forms of market relation, such as those to supermarkets, and that collective action is a
necessary but not sufficient condition to manage these costs and to facilitate participation.

Copyright # 2008 John Wiley & Sons, Ltd. J. Int. Dev. 21, 971–984 (2009)
DOI: 10.1002/jid
974 J. Blandon et al.

2 TRANSACTION COSTS AND COLLECTIVE ACTION

In traditional spot markets (SM), farmers can sell their produce without the need for an
ex ante and/or ex post relationship with buyers. This contrasts with supermarket supply
chains (SSC) where coordinated relations with buyers, through which product quality,
safety and logistics are governed, have to be established and maintained. Although
transaction costs are important in traditional markets (Key et al., 2000; Bellemare and
Barrett, 2006), these costs seem to be particularly important in vertically-coordinated
markets where, in addition to price, other institutional arrangements exist between buyers
and sellers (Peterson et al., 2001). In this context, the level and nature of transaction costs
are key determinants of market participation. These costs are associated with prior
processes of search and information gathering, bargaining and decision-making in the
process of establishing supply relations and supervision, and enforcement once supply
relations have been established (Furubotn and Richter, 1997).
A number of authors have explored the role that transaction costs play in shaping market
channel participation. For example, Hobbs (1997) measures the information, negotiation
and monitoring transaction costs associated with cattle marketing in the United Kingdom.
A wide range of factors that influence the level of transaction costs, for example grade
uncertainty, risk of not making a sale and membership of a producer organisation,
determine whether farmers participate or not. Other authors, such as Staal et al. (1997),
Holloway et al. (2000) and Winters et al. (2005), provide evidence of the importance of
transaction costs in the marketing of agri-food products in the context of small-scale
farmers in developing countries. We develop this literature further here, specifically related
to small-scale producers of fresh fruit and vegetables (FFV) in Honduras, in order to
determine the role that transaction costs play in the choice between the SM and the SSC.
A small-scale producer’s decision to participate in a new supply chain is governed by a
potentially wide range of factors, including access to information on market requirements
(for example governing product quality and the frequency and logistics of supply), the
ability to comply with such requirements on a consistent basis and the capacity to negotiate
and manage contractual arrangements. For many small-scale producers, the associated
costs can be prohibitive (see for example Poulton et al., 1998; Pingali et al., 2005; Poulton
et al., 2006). One mechanism through which such transaction costs can be reduced is
collective action (Staal et al., 1997; Holloway et al., 2000; Winters et al., 2005). Collective
efforts can help small-scale farmers to pool resources in order to access the specific assets
needed for production, achieve economies of scale and/or scope and gain bargaining power
to negotiate with buyers (Holloway et al., 2000; Levins, 2002; Lyon, 2003). Thus, in this
paper we also explore the role of collective action in overcoming the transaction costs faced
by Honduran small-scale producers in participating in the SSC.

3 DATA AND METHODS

To analyse the role of transaction costs and collective action in the decision of Honduran
small-scale farmers whether to supply the SSC for FFV, a survey of participant and non-
participant farmers was carried out over the period April to June 2005. This was informed
by a qualitative research phase during the period September 2004 to December 2004,
which included in-depth interviews with small-scale producers, supermarkets, market
intermediaries and so forth.

Copyright # 2008 John Wiley & Sons, Ltd. J. Int. Dev. 21, 971–984 (2009)
DOI: 10.1002/jid
 Small-Scale Farmer Participation in New Agri-Food Supply Chains 975

The research was undertaken in the geographical department of Intibucá in Honduras,

because of its favourable agro-climatic conditions for growing a broad array of non-
perennial FFV and its equidistant location between the main markets of Tegucigalpa and
San Pedro Sula (Figure 1). Further, FFV production in Intibucá is dominated by small-scale
producers. Predominantly, FFV production in the study area consists of crops with short
agronomic cycles, for example lettuce, cauliflower, broccoli, carrots, beets, squash and
strawberries. Here we analyse the choice between markets for FFV as a whole and not for
individual products given that most farmers produce and supply to particular markets a
range of FFV products. Further, the qualitative phase of the research suggested that the
means of production and marketing does not vary appreciably across FFV products.
A total of 325 small-scale producers were recruited to participate in the survey through
visits to their farms or homes, including both participants and non-participants in the SSC
for FFV. Reliable prior information on the number and identity of farmers producing FFV
in the community, that would have allowed random sampling, was not available. Thus,
random transects were made starting from a central location in the community in order to
minimise selection bias. According to calculations by the research team, based on INE
(2005), the number of farm households in the study area was about 3,000, although not all
of these produced FFV. Excluding the pilot sample, 261 fully-completed questionnaires
were obtained and retained for the analysis.
The main local market where farmers sell their FFV production is the town of La
Esperanza, which is located an average of 13 kilometres from the farm of respondents.
Tegucigalpa and San Pedro Sula cities, where supermarket collection centres are located,
are both approximately 200 kilometres from La Esperanza (Figure 1). Among respondents,
around 20 per cent sold to the SSC for FFV, while the remainder sold their produce in the
SM, either at the farm gate and/or in La Esperanza market.
The main supermarket chains in Tegucigalpa are La Colonia, Paiz/Despensas and Price
Smart. In San Pedro Sula the main supermarket chains are Paiz, Price Smart, Los Andes

Figure 1. Map of Honduras showing the study region

Copyright # 2008 John Wiley & Sons, Ltd. J. Int. Dev. 21, 971–984 (2009)
DOI: 10.1002/jid
976 J. Blandon et al.

and Junior. Paiz is member of CARHCO, Price Smart is a multinational company based in
the United States, and the rest of chains are local. According to the in-depth interviews,
there are no appreciable differences in the requirements and contracting practices of the
individual supermarket chains, reflecting a high degree of competition and relatively little
differentiation between the chains. Producers in the study area were engaged in the SSC to
all of these chains. These chains required that their suppliers meet quite detailed supply
schedules, in terms of volumes and time of delivery, and could comply on a consistent basis
with their quality standards, that generally covered basic parameters such as size, shape,
level of ripeness and physical damage.

3.1 Variable Description

It is expected that small-scale producer participation in the SSC for FFV is determined by
human capital variables, farm characteristics and assets and transaction costs. A critical
issue in empirical analysis in this context is that some of the hypothesised variables are not
directly observable, for example expected price and transaction costs, and their
determinants. Hence there is a need to utilise proxy variables to help control for the
effects of these unobservable determining factors (see for example David and Han, 2004).
The expected relationship between the dependent variables (Table 1) and each explanatory
variable is presented below. The predicated relationships are based on the series of in-depth
interviews with small-scale producers during the qualitative phase of the research and a
review of existing literature.

Table 1. Explanatory variables of small-scale farmer participation in the SSC for FFV in Honduras

Variable Unit SSC SM Significance

2
Gender Male ¼ 1; Female ¼ 0 75% 88%
1
Age Years 39.57 36.56
Education Years 4.54 4.66
Area FFV five years ago Hectare 0.46 0.27
Cattle five years ago Heads 5.34 3.18
Proportion of income from FFV five years ago Percentage 71% 67%
Irrigation five years ago Yes ¼ 1; No ¼ 0 67% 55%
3
Relative price Scale (1–3)
Lower (1) 14% 57%
Equal (2) 29% 17%
Higher (3) 57% 26%
Trust (a ¼ 0.7)
3
Trust in buyer Likert scale (1–5) 3.84 2.93
2
Trust in seller Likert scale (1–5) 3.90 3.60
3
Satisfaction with buyer Likert scale (1–5) 3.92 3.14
Risk (a ¼ 0.6)
3
Risk of low quality Likert scale (1–5) 2.84 3.24
Risk of weather Likert scale (1–5) 3.47 3.62
Risk of pest Likert scale (1–5) 3.22 3.35
3
Organization Yes 96% 56%
1
Significant at the 10% level.
2
Significant at the 5% level.
3
Significant at the 1% level.
Test of difference using t-test or x2 as appropriate.

Copyright # 2008 John Wiley & Sons, Ltd. J. Int. Dev. 21, 971–984 (2009)
DOI: 10.1002/jid
 Small-Scale Farmer Participation in New Agri-Food Supply Chains 977

The variable gender takes the value of one for male respondents and zero for female.
Since Honduran small-scale farms are traditionally managed by men, being male is
expected to facilitate participation in the SSC. Conversely, women are usually responsible
for household activities, making participation in more commercially-oriented market-
based livelihood pursuits difficult. The effect of age on the participation of farmers in the
SSC may be ambiguous, although the greater experience possessed by older farmers may
facilitate access to the SSC and, as a result, we hypothesise a positive relationship between
age and SSC participation. It is expected that education is positively associated with the
participation of small-scale farmers in the SSC, for example due to enhanced managerial
and/or negotiation skills.
Turning now to the farm characteristics, we use information from five years ago to avoid
potential problems of endogeneity.1 We contend that area of FFV grown by small-scale
producers is a measure of scale and is expected to be positively related to the probability
of participating in the SSC. Larger-scale of FFV production reflects (as well as determines)
the capitalisation and specialisation of farmers in the FFV sector, enabling them to meet
better the demands of the SSC. The variable cattle also provides a metric of the
capitalisation of the farm, potentially facilitating access to specific assets required for
the production of FFV in order to meet the requirements of the SSC. Thus, a positive
relationship is expected between cattle and farmer participation in the SSC. A high
proportion of income from FFV provides a measure of the level of specialisation of farmers
in the FFV sector, which is expected to facilitate participation in the SSC. Finally,
irrigation is a categorical variable which takes a value of one if the farm is irrigated and
zero otherwise. Irrigation is a key asset in FFV production; thus, a positive relationship is
expected between irrigation and participation in the SSC.
The next three variables, relative price, trust and risk, are only observed at the time of the
survey. While there is some concern about the scope for causality problems with respect to
participation in the supermarket supply chain, the in-depth interviews suggested that
farmers reassess their participation on an on-going basis, for example according to the
degree to which they consider buyers to be trustworthy. This suggests that current rather
than lagged values of relative price, trust and risk are most relevant to determining current
participation in the supermarket supply chain.
We contend that the relative price received from the SSC compared to alternative
markets is a particularly important determinant of small-scale farmer participation. The
relative price variable measures whether the price received from the farmer’s main market
is lower, equal or higher than the price they could receive in alternative markets. A priori, a
higher relative price is expected to be positively associated with participation in the SSC.
The procurement systems employed in the SSC are characterised by contractual
relationships between buyers and sellers, such that the level of trust between the parties is
an important factor influencing participation. Supermarket buyers are unlikely to engage in
supply relations with producers that they do not trust, in the context of their safety, quality
and logistical requirements. At the same time, small-scale producers are unlikely to supply
markets where they perceive there to be high risk, related to lack of trust in the buyer. To
capture this effect, the trust variable is a construct of: (1) the level of trust the farmer has in
their main buyer; (2) the farmer’s perceptions of the level of trust their main buyer has in
them and (3) the farmer’s level of satisfaction with their main buyer. The reliability of this

1
It should be noted, however, that estimations using current values for the farm characteristics provided
comparable results.

Copyright # 2008 John Wiley & Sons, Ltd. J. Int. Dev. 21, 971–984 (2009)
DOI: 10.1002/jid
978 J. Blandon et al.

construct, indicated by the value of Cronbach’s a, is good at 0.70 (Lattin et al., 2003).
A priori, positive relationship is expected between trust and participation in the SSC.
The risk variable is a construct of farmer perceptions of the risk of: (1) producing FFVof
low physical quality that does not meet buyer requirements; (2) losing FFV production due
to weather and (3) of losing FFV production due to pest. The reliability of this construct is
more marginal, with a Cronbach’s a of 0.60. A negative relationship is expected between
risk and participation in the SSC, since both high and consistent quality are key
requirements of successful participation in the SSC.
As noted above, collective action provides a potential mechanism to reduce the
transaction costs associated with markets, and in particular those characterised by greater
levels of vertical coordination and exacting buyer standards, such as the SSC. Thus,
a priori, we would expect a positive relationship between involvement in collective action
and the participation of small-scale producers in the SSC for FFV. The variable collective
action takes a value of one if the farmer belongs to a farmer organisation and zero
otherwise. However, given that almost all farmers in the SSC sub-sample were members of
a farmer organisation (see below), incorporation in the econometric analysis would not
have yielded rigorous results.
In the study area there are several farmer organisations, especially supported by non-
governmental organisations (NGO), to provide technical assistance to farmers in
production issues. However, only two organisations, namely APROFHI and DIVEFRU, are
engaged in marketing. This reflects the more general observation in Honduras that
collective action and organisation among farmers in the realm of marketing and
collaborative mechanism along the supply chain is limited (Lundy et al., 2007). The first of
these organisations (APROFHI) is a private entity with closed and paid membership,
although it was originally established by an NGO with donor funding and still receives
NGO support. The second of these organisations (DIVEFRU) is also private, although
farmers neither pay membership nor have shares. Rather, verbal contracts existing with
producers, that receive technical assistance and transportation. Both organisations are open
to new members, although the fact that entry to APROFHI requires the payment of a
membership may be prohibitive to some farmers in the area. According to the in-depth
interviews, both organisations face challenges with managing the organisation, planning
production and delivery activities and maintaining good compliance with customer
requirements among members.
Summary statistics for the explanatory variables are shown in Table 1. A quick scan
suggests that, in broad terms, farmers supplying SSC and SM are quite similar in terms of
both human capital and farm characteristics. Further, the scale of operation in both groups
is relatively small as indicated by the area of FFV grown and number of cattle, with no
appreciable difference between the two groups. Where we do see a stark contrast, however,
is in the relative price received by farmers, their perceptions of trust and risk, and
membership of a farmer organisation. Upfront, therefore, we would expect these variables
to be the major determinants of participation in the SSC versus the SM.

3.2 Econometric Approach

To assess the underlying factors influencing the probability that a small-scale farmer
participates in the SSC, we treat the dependent variable as binary, based on participation
(Y ¼ 1) or non-participation (Y ¼ 0) and estimate the probability of participation using a

Copyright # 2008 John Wiley & Sons, Ltd. J. Int. Dev. 21, 971–984 (2009)
DOI: 10.1002/jid
 Small-Scale Farmer Participation in New Agri-Food Supply Chains 979

Table 2. Probit estimation results

Variable Coefficient Marginal effect

Gender (Male)
0.446 (0.283)
0.104 (0.078)

Age (Years) 0.006 (0.009) 0.001 (0.002)
Education (Years)
0.011 (0.056)
0.002 (0.011)
Area of FFV five years ago
0.042 (0.085)
0.008 (0.017)
Cattle five years ago 0.003 (0.015) 0.001 (0.003)
Proportion of income from FFV five years ago 0.006 (0.004) 0.001 (0.001)
Irrigation five years ago (Yes) 0.133 (0.239) 0.026 (0.045)
Relative price—lower
1.2893 (0.297)
0.2583 (0.055)
Relative price—equal
0.4601 (0.289)
0.0762 (0.040)
Trust 0.3393 (0.121) 0.0673 (0.025)
Risk
0.4303 (0.121)
0.0853 (0.023)
Constant
0.701 (0.583)

N ¼ 261; Wald x2 (11) ¼ 43.630; Prob > x2 ¼ 0.000; Pseudo-R2 ¼ 0.276.

1
Significant at the 10% level.
2
Significant at the 5% level.
3
Significant at the 1% level. Standard errors in parentheses.

probit model (Gujarati, 2003). The probit model is estimated using a maximum likelihood
procedure. The resulting coefficients are interpreted using marginal effects, which
represent the change in the probability given a unit change in an independent variable
(Greene, 2000). The model is estimated using robust standard errors, to take into account
the potential problems of heteroscedasticity (Gujarati, 2003).

4 EMPIRICAL RESULTS

Table 2 shows the econometric results, including the estimated regression coefficients and
the marginal effects. The pseudo-R2 equals 0.276, indicating a good fit of the model for
cross-sectional data of this kind. The human capital variables, such as gender, age and
education, are not statistically significant suggesting that these variables are not
determinant factors in the participation of small-scale farmers in the SSC. This contrasts
with some previous studies that have found a negative relationship between farmers’ age
and participation in the SSC (for example Hernández et al., 2007) and related supply chains
(Simmons et al., 2005; Winters et al., 2005). Unexpectedly, farm characteristics and asset
variables are also statistically insignificant, contrary to a number of previous studies (see
for example Hernández et al., 2007; Neven et al., 2007). Indeed, the results suggest that the
participation or non-participation of small-scale farmers in the SSC in Intibucá, Honduras
is explained by other factors, most notably related to relative price and transaction costs.
The effect of the relative price that farmers receive in the SSC versus SM is highly
significant on small-scale farmer participation. We have already seen in Table 1 that 57 per
cent of farmers supplying the SSC receive a higher price than alternative markets,
compared to only 26 per cent of farmers supplying the SM. Thus, receiving a lower price
from the main market supplied than from alternative markets reduces the probability of
participating in the SSC by 26 per cent. Even receiving the same price from the main
market supplied as from alternative markets reduces the probability of participating in the
SSC by eight per cent. As might be expected, price acts as a coherent and strong signal for

Copyright # 2008 John Wiley & Sons, Ltd. J. Int. Dev. 21, 971–984 (2009)
DOI: 10.1002/jid
980 J. Blandon et al.

small-scale farmers in the study community to participate in the SSC, reflecting a

‘premium’ for meeting more exacting buyer requirements relating to quality standards and,
more prominently reliability and logistics parameters. In the absence of this premium most
farmers would be unwilling to absorb the greater production and (in particular) transaction
costs associated with the SSC.
Generally, farmers perceive that prices in the SSC are relatively higher than prices in the
SM. To the extent that the SM is a residual market linked to the SSC, such price differences
are to be expected. That is, producers engaged in the SSC divert any product that needs to
meet the buyer’s quality standards to the SM. However, the in-depth interviews suggested
that the quality differences between these competing supply chains are not so appreciable
as to explain the observed price differences. Rather the divergence between the SSC and
SM price predominantly reflects qualitatively and quantitatively differences in transaction
costs associated with the need to deliver a reliable supply of larger volumes of produce that
are of consistent quality, including the necessity for collective action.
From the mean Likert scale scores (Table 1) it is evident that farmers participating in the
SSC have a greater degree of trust in their buyers than farmers supplying the SM.
Participants in the SSC also perceive that their buyers have a greater level of trust in them
and are also more satisfied with their buyers than farmers supplying the SM. Thus, it is not
unsurprising that the trust variable has a significant and positive relationship with the
probability of participating in the SSC, with an associated marginal effect of seven per cent
(Table 2). The mitigating influence of trust on willingness to participate in contemporary
supply chains is well documented in the literature (Wilson and Kennedy, 1999; Chambers
and King, 2002). In the current case, farmers indicated through the in-depth interviews that,
because they were paid two or three weeks after having delivered produce, they were
initially reluctant to enter the SSC. However, through interaction with other farmers who
were already participating in the SSC and with supermarket buyers over time, mutual trust
developed that could even withstand delays in payment or rejections of produce.
The perceived risk of crop losses due to weather and pests was not statistically significant
between farmers that did/did not participate in the SSC (Table 1). Where perceptions did
differ, however, there was the risk of low quality causing rejection of the product by
customers, which was significantly higher among suppliers of the SM. Thus, perceived risk
is negatively associated with participation in the SSC, with a marginal effect of eight per
cent (Table 2). This reflects the fact that, while the SSC has more exacting standards with
respect to physical quality (Berdegué et al., 2005), and especially consistency of quality,
farmers engage in pre-grading as a means to mitigate the risk of rejection, with products not
meeting the requirements of SSC buyers being sold in the SM, usually at lower prices (see
above). Thus, even among farmers participating in the SSC, on average 21.4 per cent of
produce is sold to the SM, and in some cases this is as high as 60 per cent.
Previous studies emphasise the critical role of collective action in reducing transaction
costs and facilitating participation in more sophisticated supply chains (see for example
Staal et al., 1997; Holloway et al., 2000; Winters et al., 2005). However, our results suggest
that collective action can take various forms, not all of which facilitate involvement in the
SSC. While the organisation variable was not included in the probit model because almost
all farmers selling to the SSC are members of a farmer organisation, we can throw some
light on the role of this variable on the basis of the univariate statistics in Table 1 and the in-
depth interviews.
In total, 96 per cent of farmers supplying the SSC were members of a farmer
organisation, compared with only 56 per cent of farmers supplying the SM. This suggests,

Copyright # 2008 John Wiley & Sons, Ltd. J. Int. Dev. 21, 971–984 (2009)
DOI: 10.1002/jid
 Small-Scale Farmer Participation in New Agri-Food Supply Chains 981

however, that membership of a farmer organisation per se, is not a good predictor of
participation in the SSC; thus, why is it that we found a significant number of organised
farmers to be only supplying the SM? There are evidently differences in the functions
performed by farmer organisations. Indeed, most farmers that supply the SSC are members
of relatively new organisations that focus on marketing functions and have made
commensurate investments in handling facilities. These farmers must have the capital
required to pay membership fees and levels of trust between themselves that facilitate
marketing on a collective basis. In turn, this requires that they expend time and effort in
attending shareholder meetings and participating in periodic planning and evaluation
activities, including the design of planting and harvesting calendars. On the other hand,
some farmer organisations had ‘shied away’ from the SSC even though the potential
benefits were well recognised. The members of most of these organisations did not want to
make the necessary capital investments through their organisation and/or to engage in the
collective management required to plan production and supply schedules in order to meet
the needs of supermarket buyers. That is, they considered the transaction costs associated
with the need to act collectively to be prohibitive, even though they generally had the
capacity to meet the quality standards of SSC buyers.

5 CONCLUSIONS

The results of this study highlight the critical role of transaction costs in determining the
participation of small-scale producers in the SSC, most notably for FFV in rural Honduras.
Particularly important is the trade-off between the benefits of participation, in terms of
higher prices and the greater perceived risk associated with consistent compliance with
product quality requirements and delays in payment, mitigated by trust-based relationships
with buyers and collective action. In contrast to previous studies, however, human capital
and farm characteristics are not found to be critical factors distinguishing SSC participants
from non-participants. Further, while collective action is a necessary condition for
participation in the SSC, in and of itself this is not a sufficient condition. Farmers, through
their organisation, must be prepared to make the necessary collective investments,
establish and comply with joint planting and harvesting schedules and to market on a
communal basis.
The results reported above clearly reflect the particular characteristics of the study
community and the SSC, especially with respect to buyer requirements. Currently, the
predominant demands of buyers relate to logistics and supply schedules and consistency
with respect to basic physical quality parameters. There is little or no focus on methods of
production, such that farmers are free to use any practices they wish in pursuit of their
buyers’ requirements. As such, while the results of the study add to a growing literature on
small-scale farmer participation in higher-value supply chains, care is needed in translating
these results to other contexts. This study is not peculiar in this.
The existing literature raises the spectre of the exclusion of small-scale producers from
higher-value supply chains, whether to export markets or domestic supermarkets. With the
increasing dominance of such markets, and the consequent marginalisation of the
traditional SM, fundamental questions have been raised about the future of small-holder
production and of appropriate ways forward for agricultural and rural development. The
results presented above suggest that small-scale producers can meet the more exacting
requirements of higher-value domestic markets, at least in the Honduran context, provided

Copyright # 2008 John Wiley & Sons, Ltd. J. Int. Dev. 21, 971–984 (2009)
DOI: 10.1002/jid
982 J. Blandon et al.

they act collectively. This suggests the need not to lose sight of the need for effective farmer
organisations as our focus shifts to changes further up agri-food supply chains. At the same
time, however, transaction costs remain a critical issue; where these costs are higher (as in
the SSC) mechanisms need to be found to bring these costs down and/or there must be
offsetting benefits, most obviously through price. Small-scale producers will only
participate in new forms of supply relations if there is an economic rationale to do so.

ACKNOWLEDGEMENTS

The authors acknowledge the International Development Research Centre (IDRC), which
supported the data collection for this study through its Doctoral Research Awards program.
Likewise, we acknowledge the time and efforts of participants in the study and of the local
organizations in Honduras with which they work.

REFERENCES

Bellemare MF, Barrett C. 2006. An ordered tobit model of market participation: evidence from Kenya
and Ethiopia. American Journal of Agricultural Economics 88(2): 324–337.
Berdegué JA, Balsevich F, Flores L, Reardon T. 2005. Central American supermarkets’ private
standards of quality and safety in procurement of fresh fruits and vegetables. Food Policy 30(3):
254–269.
Corporación de Compañı́as Agroindustriales, CCA. 2006. Corporación de compañı́as agroindus-
triales. Available at http://www.cca.co.cr/artman/publish/article_58.shtml.
Chambers W, King RP. 2002. Changing agricultural markets: industrialization and vertical coordi-
nation in the dry edible bean industry. Review of Agricultural Economics 24(2): 495–511.
David RJ, Han SK. 2004. A systematic assessment of empirical support for transaction cost
economics. Strategic Management Journal 25(1): 39–58.
Dolan C, Humphrey J. 2000. Governance and trade in fresh vegetables: the impact of UK super-
markets on the African horticulture industry. Journal of Development Studies 37(2): 147–176.
Fairbairn B. 2003. The Role of Farmers in the Future Economy. Centre for the Study of Cooperatives,
University of Saskatchewan: Saskatoon, SK.
Fold N, Pritchard B. 2005. Introduction. In Cross-continental Food Chains, Fold N, Pritchard B
(eds). Routledge: Abingdon, VA.
Furubotn EG, Richter R. 1997. Institutions and Economics Theory: The Contribution of the New
Institutional Economics. The University of Michigan Press: Ann Arbor, MI.
Glover D, Kusterer K. 1990. Small Farmers, Big Business. St. Martin’s Press: New York.
Greene WH. 2000. Econometric Analysis. Prentice-Hall, Inc.: Upper Saddle River, NJ.
Gujarati D. 2003. Basic Econometrics. McGraw-Hill: New York.
Hellin J, Higman S. 2003. Feeding the Market: South American Farmers, Trade and Globalization.
Kumarian Press, Inc.: Bloomfield, CT.
Henson SJ, Reardon T. 2005. Private agri-food standards: implications for food policy and the agri-
food system. Food Policy 30(3): 241–253.
Hernández R, Reardon T, Berdegué J. 2007. Supermarkets, wholesalers, and tomato growers in
Guatemala. Agricultural Economics 36(3): 281–290.
Hobbs JE. 1997. Measuring the importance of transaction costs in cattle marketing. American
Journal of Agricultural Economics 79(4): 1083–1095.

Copyright # 2008 John Wiley & Sons, Ltd. J. Int. Dev. 21, 971–984 (2009)
DOI: 10.1002/jid
 Small-Scale Farmer Participation in New Agri-Food Supply Chains 983

Hobbs JE, Cooney A, Murray F. 2000. Value Chain in the Agrifood Sector. Department of
Agricultural Economics, University of Saskatchewan: Saskatoon, SK, Canada.
Holloway G, Nicholson C, Delgado C, Staal S, Ehui S. 2000. Agroindustrialization through
institutional innovation: transaction costs, cooperatives and milk-market development in East-
African highlands. Agricultural Economics 23(3): 279–288.
INE. 2005. Instituto nacional de estadı́sticas. Censo nacional de población y vivienda 2001.
Available at http://www.ine-hn.org/.
Jaffee S, Bintein G. 1996. French beans connections: sustaining success in a Kenyan contract farming
venture. African Rural and Urban Studies 3(3): 63–99.
Key N, Sadoulet E, de Janvry A. 2000. Transactions costs and agricultural household supply
response. American Journal of Agricultural Economics 82(2): 245–259.
Key N, Runsten D. 1999. Contract farming, smallholders, and rural development in Latin America:
the organization of agroprocessing firms and the scale of outgrower production. World Devel-
opment 27(2): 381–401.
Lattin JM, Carroll JD, Green PE. 2003. Analyzing Multivariate Data. Brooks/Cole-Thomson
Learning: Pacific Grove, CA.
Levins RA. 2002. Collective bargaining by farmers: fresh look? Choices 17(4): 15–18.
Little P, Watts M. 1994. Introduction. In Living Under Contract: Contract Farming and Agrarian
Transformation in Sub Saharan Africa, Little P, Watts M (eds). University of Wisconsin Press:
Madison, WI.
Lundy M, Banegas R, Centeño L, Rodrı́guez I, Alfaro M, Hernández S, Cruz JA. 2007. Assessing
small-holder participation in value chains: the case of vegetables in Honduras and El Salvador. In
Governance, Coordination and Distribution along Commodity Value Chains. FAO: Rome; 209–
225.
Lyon F. 2003. Community groups and livelihoods in remote rural areas of Ghana: how small-scale
farmers sustain collective action. Community Development Journal 38(4): 323–331.
Maertens M, Swinnen JFM. 2007. Trade, standards and poverty: evidence from Senegal. LICOS
Discussion Paper No. 177/2007. Katholieke Universiteit Leuven: Leuven, Belgium.
Masakure O, Henson S. 2005. Why do small-scale producers choose to produce under contract?
Lessons from non-traditional vegetable exports from Zimbabwe. World Development 33(10):
1721–1733.
McCulloch N, Ota M. 2002. Export horticulture and poverty in Kenya. Working Paper No. 174.
Institute of Development Studies: Sussex, UK.
Minten B, Randrianarison L, Swinnen JFM. 2006. Global retail chains and poor farmers: evidence
from Madagascar. LICOS Discussion Paper No. 164/2006. Katholieke Universiteit Leuven:
Leuven, Belgium.
Neven D, Odera M, Reardon T, Wang H. 2007. Kenyan supermarkets and emerging middle-class
horticultural farmers. World Development (in press).
Peterson HC, Wysocki A, Harsh SB. 2001. Strategic choice along the vertical coordination
continuum. International Food and Agribusiness Management Review 4(2): 149–166.
Pingali P, Khwaja Y, Meijer M. 2005. Commercializing small farms: reducing transaction costs. In
The Future of Small Farms: Proceedings of a Research Workshop. International Food Policy
Research Institute: Washington, DC; 61–74.
Pinstrup-Andersen P. 2002. Food and agricultural policy for a globalizing world: preparing for the
future. American Journal of Agricultural Economics 84(5): 1201–1214.
Poulton C, Dorward A, Kydd J, Poole N, Smith L. 1998. A new institutional economics perspective
on current policy debates. In Smallholder Cash Crop Production Under Market Liberalization,
Dorward A, Kydd AJ, Poulton C (eds). CAB International: Wallingford, UK.

Copyright # 2008 John Wiley & Sons, Ltd. J. Int. Dev. 21, 971–984 (2009)
DOI: 10.1002/jid
984 J. Blandon et al.

Poulton C, Kydd J, Dorward A. 2006. Overcoming market constraints on pro-poor agricultural

growth in Sub-Saharan Africa. Development Policy Review 24(3): 243–277.
Reardon T, Barrett CB. 2000. Agroindustrialization, globalization, and international development: an
overview of issues, patterns, and determinants. Agricultural Economics 23(3): 195–205.
Reardon T, Berdegué J. 2002. The rapid rise of supermarkets in Latin America: challenges and
opportunities for development. Development Policy Review 20(4): 371–388.
Reardon T, Timmer P. 2005. Transformation of markets for agricultural output in developing
countries since 1950: how has thinking changed? In Handbook of Agricultural Economics:
Agricultural Development, Farmers, Farm Production and Farm Markets, Evenson R, Pingali
P, Schultz TP (eds). North-Holland: New York.
Reardon T, Timmer P, Berdegué J. 2004. The rapid rise of supermarkets in developing countries:
induced organizational, institutional, and technological change in agrifood systems. Electronic
Journal of Agricultural and Development Economics 1(2): 168–183.
Simmons P, Winters P, Patrick I. 2005. An analysis of contract farming in East Java, Bali, and
Lombok, Indonesia. Agricultural Economics 33(s3): 513–525.
Singh S. 2002. Multi-national corporations and agricultural development: a study of contract farming
in the Indian Punjab. Journal of International Development 14(2): 181–194.
Staal S, Delgado C, Nicholson C. 1997. Smallholder dairying under transaction costs in East Africa.
World Development 25(5): 779–794.
Stanton J. 2000. The role of agribusiness in development: replacing the diminished role of the
government in raising incomes. Journal of Agribusiness 18(2): 173–187.
Swinnen JFM. 2007. Global supply chains, standards and the poor: some empirical and theoretical
insights. Paper Presented at the Farrell Lecture. University of Guelph, Guelph: Guelph, Ont.,
Canada.
Wilson PN, Kennedy AM. 1999. Trustworthiness as an economic asset. International Food and
Agribusiness Management Review 2(2): 179–193.
Winters P, Simmons P, Patrick I. 2005. Evaluation of a hybrid seed contract between smallholders and
a multinational company in East Java, Indonesia. The Journal of Development Studies 41(1):
62–89.

Copyright # 2008 John Wiley & Sons, Ltd. J. Int. Dev. 21, 971–984 (2009)
DOI: 10.1002/jid